CAN INCREASES in the size of the population raise productivity? New research by Yale Economist Michael Peters suggests that a large refugee settlement after World War II had three important consequences:
- Large and persistent increase in the size of the local population;
- It spurred local industrialization by increasing labor in the manufacturing sector and decreasing labor in the agriculture sector; and
- Increases in per-capita income, particularly in the long run.
Main Research Question: How do local economies respond to large increases to the size of their population? In a new paper published in Econometrica, Professor Peters estimated the effects of refugee inflows on population growth, industrialization, and income growth.
Research Context: The positive relationship between population size and productivity is at the heart of virtually all theories of economic growth. This paper explores a particular historical setting to provide direct evidence for the empirical relevance of these effects.
At the end of the Second World War, the governments of the United States, the United Kingdom, and Russia expelled millions of ethnic Germans from Eastern Europe and transferred them to West Germany and the Soviet Occupied Zone. The ensuing expulsion was implemented between 1945 and 1948 and represents one of the largest forced population movements in world history. By 1950, about 8 million people had been transferred to West Germany, increasing its population by more than 20 percent. Upon their arrival in West Germany, the refugees were not free to settle where they wanted to. Rather, their assignment was organized and implemented by the military governments of the US and the UK, and refugees were predominantly sent to rural and thus less developed locations. Housing was relatively abundant in these areas, especially in the light of the Allied bombing campaign, which had left many cities largely destroyed.
Data and Analysis: To estimate the relationship between refugee inflow and local economic development, Professor Peters constructed a data set from original historical sources for more than 500 West German counties since the 1930s. At the heart of this analysis are West Germany population censuses for the years 1933, 1939, 1950, and 1961. These publications report a variety of outcomes, such as population size, employment information, sex ratios, and other characteristics.
To estimate the effects of the refugee settlement on the local economy, Professor Peters focused on the following outcomes: population growth, changes in the sectoral employment shares (for manufacturing, agriculture, and services), and growth in income, in both the short and long run. Using a structural model, his analysis allowed him to quantify the effect of the refugee settlement on aggregate income and study how the government policy of sending refugees to the countryside might ignite and maintain rural industrialization.
Results: Refugee settlement led to persistent increases in the local population, the share of people working in manufacturing, and income per capita.
Refugee inflows had a direct impact on long term population growth, meaning many of the refugees settled permanently in those regions. These large inflows led to persistent changes in the sectoral composition of the local economy. For example, after refugee settlement, the manufacturing sector expanded and stayed higher many years after refugees arrived. These mass migrations also led to a long-term increase in income-per-capita for the aggregate economy: a 10 percent increase in the share of refugees increased income per capita by roughly 5–6 percent after 15 years, and roughly 12 percent after 25 years. These results provide direct evidence on the link between population growth, industrialization, and subsequent income growth.
The persistent long-term effects of the refugee settlement imply that the government policy of settling refugees in rural labor markets might have changed the long-term path of local industrialization in West Germany. In particular, refugee settlement seemed to have ignited the process of industrialization in agricultural communities.
Research Summary by Luke Strathmann